Filing taxes is essential for anyone in the income tax bracket. Taxes are one of the government’s primary sources of income generation, and failing to pay taxes can lead to devastating consequences for an individual.
Individuals can unintentionally or intentionally deviate from paying taxes due to the lack of awareness regarding the consequences of not paying taxes. In this article, we shall talk about the implications of what happens if you don’t file for taxes.
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The Role of The IRS
The Internal Revenue System (IRS) is a government authority body that provides guidelines and regulations to ensure that taxes are cleared by every citizen in the United States (US). With the IRS Free File service, they offer an easy-to-use platform that guarantees 100% accuracy, enabling taxpayers to file their returns and reclaim every dollar they deserve. Keeping meticulous records of taxpayers’ financial activities, IRS analysts wield their expertise to scrutinize these records according to specific criteria for inaccuracies or discrepancies. If errors or other issues are identified, they fall under the purview of the IRS to address right away.
Should a taxpayer fail to submit their tax return, the IRS may seize the initiative and, with a substitute return, file a tax return on their behalf, thus mitigating further hardship and ensuring the financial wheels keep turning. This showcases the IRS’s proactive approach in handling all tax-related matters to ensure outstanding liabilities are cleared without banking on the taxpayer’s voluntary participation.
What Do I Need to Know?
Refer to the tax form’s instructions for the due date:
- Form 1040 series for individuals – April 18
- Form 1120 series for corporations – March 15
- Form 1065 series for partnerships – March 15 for years beginning after December 31, 2015, and April 18 for prior years.
Missing the tax deadline can result in penalties. The IRS charges a failure-to-file penalty and a failure-to-pay penalty. Minimize these penalties by addressing your tax obligations promptly.
Consequences of not filing taxes
The consequences of not filing taxes can be severe. The IRS can take stringent actions, including legal methods; thus, such methods can be stressful for any individual. Let us have a look at the various consequences of not filing taxes by any taxpayer:
1. Legal actions
Legal methods are the first and foremost action the IRS takes to recover the tax debt amount. Failure to surpass income thresholds or file taxes can have different legal consequences. IRS increases these thresholds due to inflation, as stated by Julia Glum, a news editor with robust experience in personal finance journalism. Legal consequences range from significant legal charges to potential criminal charges and even imprisonment. This severity is influenced by the amount of tax debt left, the intention behind non-payment, and how long the tax defaulting has occurred. The IRS, often resorting to email communication, sends repeated warnings and notices to remind individuals to meet their tax obligations.
2. Tax Refund
Filing taxes in the correct order can help taxpayers in getting a tax refund for the overpaid taxes. But what happens if your state tax filing discloses an entitlement to a bigger refund than you’ve received? According to the IRS (data ending 02/17/23), the average refund is approximately $3,140 — although your specific refund may differ. Unfortunately, errors can lead to the forfeiture of hard-earned money to the government. Even more crucial, keep in mind the tax filing deadline. Delayed filing beyond three years of the original due date risks encroaching on the refund statute of limitations threshold, leading to a potential loss of your tax refund. Prevent such issues using a reliable calculator and heed professional advice to ensure successful tax filing.
3. Debt accumulation
This is particularly tough for individuals who run their businesses and have to pay several types of taxes but fail to do so. Such situations might involve “back taxes,” often due to unchecked financial management. Different types of taxes a business needs to deposit include income tax, employment tax, sales tax, and more. Understanding the implications of these liabilities and their specific “tax filing status” is crucial – with about 37% of filers qualifying for extra help on Schedule C tax forms. If you don’t file, the IRS initiates a series of notices, including CP59, CP515, CP516, and CP518. The substitute for the return process may occur, where the IRS files a return on your behalf. Contesting the bill is possible by filing your delinquent return.
Failure to do so can lead to incurring steep penalties – after 60 days of failing to pay, your bill, in addition to the initial taxes owed, will be a minimum of $485 for the tax year 2023, or 100% of the tax required to be shown on the return, whichever is less.
4. Financial support
Failing to file taxes on time can result in consequences such as not getting loans in time of need or even availing of government grants whenever needed. This can result in several casualties for the person in tax debt.
Since lenders or banks need the exact, updated tax records and without them, they cannot process any kind of loans or grants as it helps in determining the credit capabilities of a person, no loans or grants can thus be issued in favor of the person facing a tax debt.
The IRS is stringent in these cases of maintaining updated files, and if they put up the record that a person still needs to file taxes, there is no chance of getting loans.
5. Credit score damage
Certain bureaus maintain an individual’s credit score, which helps determine a person’s credit capabilities. A lower credit score means mitigating the chances of loan approvals and denying grants.
A person facing tax debt issues due to not filing on time can get no credit cards, mortgages, or other types of loans. Thus, having a tax debt can result in numerous problems related to the credit score, and once damaged, this score cannot be reversed quickly and is a significant consequence of what happens if you don’t file for taxes on time.
6. Tax Leins
Leins are the worst of the consequences that can be faced by an individual who is already facing a tax-related issue. Facing a situation of tax lien means that the IRS has the full authority to seize all kinds of personal and financial assets a person has to ensure that the recovery of the tax debt amount is done smoothly.
It can be a grave situation for anyone as people are even rendered homeless due to the reason of tax liens. It can result in the rise of stress and anxiety in any person.
Penalties for Unfiled Returns
1. Failure-to-File Penalty
The failure-to-file penalty is 5% of the unpaid monthly taxes, capped at 25%. Additionally, there’s a failure-to-pay penalty of 0.5% each month. Penalties can be abated through penalty abatement for reasonable cause or first-time penalty abatement.
2. Interest and Additional Penalties
In addition to the failure-to-file and failure-to-pay penalties, interest accrues on the tax balance. Exploring penalty abatement options for reasonable cause is crucial, and first-time penalty abatement can be sought.
Tips to not face failure in tax filing consequences
Since facing failure in tax filing can result in numerous different types of problems, which can cause a person financial and emotional stress along with damage to the person’s image, the below pointers shall talk about some of the tips to avoid facing such adverse situations:
1. Organized Approach
Staying in an organized manner throughout the year can help in the better assessment of taxes. This includes maintaining the income statements, documentation, receipts, and other such records, which helps maintain proof of the exact tax amount and all the tax deduction documents she needs to be paid. Therefore, always try to keep a structured manner of the documents that can be accessed immediately at the time of need.
2. Self-taxation
Understanding the self-taxation situation is of utmost importance as it can help better analyze a person’s entire tax-related situation. The need to file a tax return is especially pertinent in self-employment, where income type and amount, tax filing status, and age, amongst other factors, play a significant role. Knowledge of self-taxation is imperative for accurate tax filings and understanding your credit situations, loan-taking capabilities, and other financial assistance. It can further help leverage tools like TurboTax Premium, which pays for itself by calculating the deductible business expenses at the self-employment tax income rate.
3. Talking with a professional
Consulting a professional who is an expert in taxation and financial fields is of utmost necessity. They can help in the dodging of various problems at any given point in time. They can even fight legal cases with the IRS and negotiate different ways of settlement with the IRS to ensure that their client is entirely protected from any kind of problem.
These professionals can deal with the IRS while working in favor of the client and provide different payment solutions such as Offer in Compromise (OIC), installment payments, and many such policies that the government already designed in favor of the taxpayers.
4. Delay of payments
Never even think of delaying the tax payments, as such situations cause the onset of tax debt. Always try to clear off the tax debt amount within the stipulated deadline to avoid problems.
People must also ensure they are well prepared to pay their taxes ahead of time. This would help develop a sense of habit and ensure that the tax payment deadlines are never exceeded.
5. Revise the filings
Cross-checking the tax filings before the final submission is again of great importance as any type of misfilings or wrong filings shall result in facing severe consequences the IRS keeps a keen watch on all the filings of individual taxpayers, and while analyzing if they detect any kind of error or false information, it may lead to legal actions or imposition of penalties.
6. Consult the IRS
One can always talk about their problems with the IRS as they understand the situation and often provide solutions. Although it acts as an authority, the IRS still works for the betterment of the people. Therefore, one can easily approach the IRS, making things transparent and more accessible.
Final Overview
The consequences of what happens if you don’t file for taxes can be severe and can result in grave consequences. Therefore, it is of utmost necessity to file the proper taxation files and, if needed, take the help of professionals who are well-versed in this field.
Making proper tax filings helps prevent legal cases, financial liabilities, liens, degraded credit scores, and many such disadvantages. Always try to file the tax files at the right time and make payments before the deadline or within the stipulated time frame.
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Frequently Asked Questions
Q1: What happens if I don’t file my tax return?
A: The IRS initiates a series of notices, including CP59, CP515, CP516, and CP518. If unresponsive, the IRS may file a substitute for return (SFR).
Q2: How can I contest an IRS-filed return (SFR)?
A: Contesting an SFR is possible by filing your delinquent return promptly. This allows you to include deductions and potentially reduce the tax amount.
Q3: What penalties apply for unfiled returns?
A: Penalties include the failure-to-file penalty (5% per month, capped at 25%) and the failure-to-pay penalty (0.5% per month, capped at 25%). Interest also accrues on the tax balance.
Q4: How long can I go without filing taxes?
A: While annual filing is ideal, occasional missed deadlines can occur. The IRS requires filing by April 15 each year. File a tax extension form if unable to meet the deadline.
Q5: Are there instances where I don’t need to file a tax return?
A: If earnings are under a certain income threshold, filing may not be required. However, consider filing to claim a tax refund potentially.
Q6: What legal actions can the IRS take for not filing taxes?
A: The IRS can take legal actions, leading to criminal charges, imprisonment, and fines. The severity depends on the amount of tax debt, intention, and duration of non-compliance.
Q7: Can the IRS seize assets for non-payment of taxes?
A: Yes, the IRS can seize personal and financial assets to recover tax debts, mainly through tax liens.
